Government Is Borrowing, Corporations Are Saving: Coincidence?

Government Is Borrowing, Corporations Are Saving: Coincidence?

Today on the BBC’s The World Tonight, I had a very civil discussion with Robert Reich about the economics of a fifth round of stimulus spending, which now seems to be an inevitability. (I’ll link the audio when it is available.) Mr. Reich took the conventional Keynesian view that our problem is a deficit in aggregate demand, which discourages producers from offering new products and services, from building factories and opening offices, and from hiring people to staff them.

“Government,” Reich said, “has to be the buyer of last resort.” I do not think he made a very convincing case. For a Keynesian, it’s always 1933. But it may very well be 1973, instead: the doorstep of staglation.

A few thoughts:

As F. A. Hayek put it, “The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.” (Those words should be engraved on the Federal Reserve building and the U.S. Treasury.) There are lots of sophisticated economic thinkers in the Obama administration, just as there were in the Bush administration, just as there were in the Clinton administration. Alan Greenspan has forgotten more economics than the average homo sap. will ever dream of. None of them has got the policy right. It is very, very difficult to transmute economic knowledge into fruitful public policy. If Mr. Greenspan could have foreseen the consequences of the Fed’s keeping interest rates so low for so long, surely he would have chosen to do otherwise. If the hundreds of U.S. policymakers who spent decades upon decades stimulating the residential real-estate market had been able to foresee that they were creating a bubble that would end in a crash, dragging the world financial system down with it, they surely would have chosen to act otherwise. But it is impossible to see into the future with any great clarity.

With that in mind: We do not know what will be the consequences of our current descent into unprecedented deficits and mushrooming sovereign debt. Prudence dictates that we proceed with the utmost caution — in fact, that we do not proceed at all farther down the path to deeper national debt.

Mr. Reich pointed to the 1950s, during which time the United States was able to grow so robustly, with the economic benefits so thoroughly dispersed throughout the population, that the debts left over from the FDR era and World War II were of relatively little economic consequence. Here’s the problem with that line of thinking: We are not in the post–World War II economy. The economic circumstances of the postwar era were utterly unique: The majority of the world’s productive manufacturing capacity was in the United States, Europe and Asia having fully militarized their economies only to see their factories and capital blown to bits, their work forces decimated (and, in some cases, worse than decimated). That is not going to happen in 2010, let us pray.

There are some other problems with the orthodox Keynesian account. As Tyler Cowen has asked: If aggregate demand really is so weak, why are profits so strong? Harley Davidson, to take one example, saw its profits quadruple in its last report, and it is a company that is very much dependent upon American buyers. Other firms, from Pepsi to Mattel to Ameritrade, have seen very strong profits of late. Analysts have remarked that, in terms of profits, this is one of the strongest recoveries we’ve seen in a good long while. That does not comport with Mr. Reich’s account.

In any case, profitable businesses are a more sure source of economic growth and jobs than are temporary government-spending measures. I’d rather have a job at the Harley factory than a job that depends upon such ingenious Obama stimulus proposals as the purchase of a polar icebreaking ship ($87 million) or new subsidies for beekeepers and fish-farmers ($150 million). Government is a reliable misallocator of capital, and that stimulus money has to come from somewhere. Where? From the sort of people who might like to start a factory to compete with Harley Davidson, or a toy company to compete with Mattel, and earn some profits of their own.

As my colleague Stephen Spruiell has pointed out, once this latest round of stimulus (in the form of expanded unemployment benefits) has gone out the door, we will have spent more trying to stimulate the economy than we spent on the Iraq war and the Afghanistan war — combined. To what end? Ten percent unemployment? A tottering recovery? The Democrats will argue that things would have been worse without the stimulus, that it would have worked better if it had been larger, etc. That hypothesis has the political advantage of being unfalsifiable. But we can look around the world and see that other countries that have enacted proportionally smaller stimulus programs have fared better than we have. (The Germans, of all people, are wondering what has gotten into us, why we seem to be going all Italian.)

Consumer demand is not the fundamental problem; it is, if anything, a symptom of the deeper problem: a few trillion dollars’ worth of devalued capital in the form of a cratered real-estate market and a similarly knee-capped market for mortgage-backed securities. Stimulus spending is not going to drive housing prices back up to where they were, and that is a good thing: We should not try to reinflate the bubble. Remember that our current problem is, in no small part, the result of earlier attempts to stimulate the economy through artificially low interest rates. Rather than allowing the markets to sort out the banks and the mortgage securities, we’ve propped up weak institutions, given a blank check to the government-sponsored enterprises at the heart of the problem — Fannie Mae and Freddie Mac — and produced an inscrutable financial-reform bill that will do little or nothing to address the fundamental problems behind the recent crisis, and little or nothing to prevent future bailouts, should such measures become politically feasible. The real cause of the credit crisis is the intertwining of politics and finances, and we have only complicated and deepened that relationship.

Which is to say: This is not 1933. A monetary tsunami may (or may not) follow this radical expansion of the money supply and credit. There are no obvious signs of inflation, but there need not be: General-price inflation can happen very rapidly, with little apparent warning. The truth is, nobody knows. And when you don’t know, you proceed with caution. It is not a coincidence that American corporations are adding rapidly to their cash reserves at the same moment that the American government is adding rapidly to its debts. Which course of action seems more prudent?

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